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雷达卡
Industrial Engineering
End of the upcycle
Engineering services is a late-cyclical sector and we see hard times ahead for
both Arcadis and Grontmij. We believe that neither company will benefit enough
from government stimulus packages to compensate for the decline in more
cyclical business areas.
Table 1 : Key recommendations & forecasts
Bloomberg Year-end Recommendation Price
Target
price EPS1 fcst PE1 fcst
Arcadis ARCAD NA Dec-09 Hold 11.08 10.00 1.00 11.08
Grontmij GRONT NA Dec-09 Hold 16.51 18.00 2.36 6.99
Priced at close of business 15 April 2009
Source: Company data, ABN AMRO forecasts
Sector peaked in 2008
We believe that margins for the engineering sector will come under pressure in the coming
years because: 1) the engineering sector’s margin is at its highest level in decades; and
2) utilisation rates peaked in 2008, but have come under pressure recently in selected areas,
which we believe will spread to other activities. Some engineers have reduced their exposure
to detailed engineering and/or capital-intensive activities and have invested in higher-margin
activities. This will likely keep future trough margins higher than before, but this does not
mean cyclicality has left the sector.
What we see in store for 2009 and beyond
We are witnessing slightly lower utilisation rates in selected areas and believe this will spread
to other activities. Subsequently, hourly rates would come under pressure as engineers want
to protect the utilisation rate as much as possible given that it is a much more important
determinant of company margin than pricing developments. The final stage is restructuring.
The duration of this downturn is difficult to determine, but if the previous engineering
downcycle is any indication, sector margins could be under pressure for four years on
average.
Arcadis (Hold, target price €10): US growth engine stalling?
Arcadis aggressively pursued a large position in the US environmental market long before it
became fashionable. This has served the company well and should continue to do so.
However, we believe Arcadis’s relatively high exposure to the private sector will be
disadvantageous in the current economic downturn and limit the benefits from the US
stimulus packages.
Grontmij (Hold, target price €18): Municipalities look more uncertain
By divesting itself of most of its capital-intensive activities, Grontmij’s profile has improved
since the last downturn. Grontmij’s exposure to (semi-)public clients (which we estimate
contribute 70% of total revenues) should protect the company from the worst of this
economic downturn. However, we show that budgets for municipalities (Grontmij’s most
important client group) will likely come under pressure. At the same time, we believe results
will become more volatile due to the significant amount of business done through joint
ventures and associates.
Contents
End of the upcycle 3
We believe the engineering sector margin peaked in 2008, utilisation rates will
come under pressure and real higher hourly rates are stable to down. Bloomberg
consensus sees earnings stability after a down year in 2009. We believe this is
unlikely.
How long could this downturn take? 5
Company profiles 6
Arcadis 6
Grontmij 22
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